‘China reliant on investment spending to deliver GDP growth’

China has become increasingly reliant on investment spending to deliver GDP growth, which reflects the way in which the exceptionally large credit stimulus was implemented after the Lehman crisis, financial services firm Citi’s Emerging Markets Macro and Strategy Outlook has said.

According to the research note, this has caused an upward shift in China’s share of global commodities consumption.

“‘China-dependence’ is no new phenomenon in the global economy, but its importance has been reinforced in the past few months. Back in March, Citi expected 24 per cent of global GDP growth to be generated by China in both 2011 and 2012. Our forecasts now show this contribution rising to 28 per cent this year and to 30 per cent next year,” the note said.

“On the face of it, China seems less vulnerable to an external shock than it was pre-Lehman, since net exports are making a much smaller contribution to GDP growth than they used to — another consequence of the credit stimulus.

“Yet China’s vulnerability to a global slowdown shouldn’t be underestimated: total exports account for more than a quarter of GDP and the export sector employs a big army of labour,” it said.

According to the report, China has plenty of room to deliver new stimulus measures, both fiscal and monetary. But the efficiency of additional credit stimulus may be weaker than it was post-Lehman and it might take a shock to asset prices in order for the Chinese authorities to put stimulus measures in place.

“In view of these risks, we put together a very simple framework to help investors think about what economic contagion risks might result from a sharp China slowdown. But this is tentative. Absence of the Chinese engine for global GDP growth would contain very broad risks.

“The credit stimulus remains substantial, and appears to create something of a virtuous circle: since credit extension remains high, so does investment spending; and since investment spending remains high, so does GDP growth; and since GDP growth remains high, asset quality in the financial sector remains healthy-looking.

“Yet the recent decline in the marginal efficiency of investment spending raises some questions about how easily this virtuous circle can be sustained,” it said.